Strong housing market demand, accommodating supply

Budapest, 10 November 2017 – During the first half of 2017, the Hungarian housing market was characterised by stronger demand conditions and gradually accommodating supply, accompanied by rising domestic house prices. On the demand side of the housing market, practically all factors point to a pick-up: strong wage growth, rising savings and the improvement in labour market indicators were coupled with a 34 per cent annual increase in the volume of new housing loans. New housing supply shows a gradual accommodation; however, 41 per cent of development projects are characterised by delays, thus in Budapest a larger number of completions of new dwellings is expected at the end of 2018. At the end of the first half of 2017, average domestic house price appreciation was slightly above 15 per cent in year-on-year terms, according to the values of the MNB house price index. The appreciation dynamics of house prices slowed in the capital and accelerated in smaller settlements. Overall, the level of domestic house prices falls short of that justified by economic fundamentals; however, continuous monitoring of the market is indispensable, due primarily to the pick-up in lending and increased prices in the capital.

Domestic house prices continued to rise in the first half of 2017, in an environment characterised by strong market demand and gradually adjusting supply. According to the MNB's house price index, house prices increased at an annual nominal rate of just over 15 per cent, similar to what was seen in 2016. In real terms, house prices rose by 12.8 per cent per annum in the period under review, and this increase may continue in 2017 according to our short-horizon forecast, albeit somewhat more slowly, at a rate of 11 per cent annually. According to our estimation, despite the continuous rise, on a national average the level of house prices remains below the level justified by the macroeconomic fundamentals. House prices in Budapest have already reached the level considered as equilibrium, and thus – despite the fact that there is still no significant overvaluation – it is essential to closely monitor the market in the capital.

The Hungarian housing market shows a heterogeneous picture both in geographical terms and based on the size of settlements. After the turnaround on the housing market in 2014, the strongest growth was experienced in Budapest, both in terms of market turnover and house prices, but starting from 2017 different trends have been observed. Annual growth in house prices is gradually tapering off in the capital. The annual price increase of 14.6 per cent recorded in the first half of 2017 is already substantially lower than the roughly 27 per cent increase seen one year ago. Moreover, due to the higher prices, the number of housing market transactions also declined in Budapest. On the other hand, growth in house prices accelerated in the municipalities, accompanied by a rise in market turnover.

During the first half of 2017, the factors determining the demand side of the housing market continued to improve. Households’ real income has been growing at stable rates of 3-4 per cent in recent years, and at the same time the employment ratio also risen to historically high levels. Consequently, the favourable income and labour market situation of the household sector points to a continued recovery of the market, and the intense wage outflow has also substantially boosted the savings of the sector.

The favourable demand conditions are also being felt in lending for housing purposes. During the first half of 2017, in parallel with the steady rise in the volume of new housing loans, the role of mortgage lending among housing market transactions also increased. The volume of new housing loans rose by 34 per cent in annual terms, while the number of loans taken for the purpose of house purchase, as a ratio of market transactions, continued to increase, rising to somewhat over 40 per cent. The ratio of loans taken for the purpose of building or purchasing newly constructed houses is steadily increasing within new contracts. On the whole, the level of lending for housing purposes as a proportion of GDP is low in Hungary both in European and regional terms, and hence there is still plenty of room for growth in lending. According to banks’ responses to the Lending Survey, the standards of housing loans have not changed significantly. The average interest rate spread on housing loans decreased somewhat both for variable and fixed rate products, but the spread on the latter still exceeds the spread on variable rate products, and – on the whole – the level of interest rate spreads is higher than the regional average.

The supply side of the housing market is characterised by gradual adjustment. Following the sharp rise in the number of construction permits issued in 2016 at the national level, compared to the previous year the number of newly built homes increased by about 42 per cent during the half year under review. Based on the anticipated completion date of new home projects presently under construction in the capital, the number of completions may increase substantially at the end of 2018. In 2017 a total of 3,200 new homes are expected to be completed and delivered in Budapest, whereas by 2018 this number may be as high as 7,700. However, the planned completion date was postponed in 41 per cent of the projects; on average, new dwellings under construction are being completed just over six months later than scheduled. On the supply side of the housing market, the labour shortage perceived by companies in the construction sector still poses difficulties, while the increase in the probable time to sell new dwellings may indicate a modest deterioration in the developers' bargaining position. For the time being, the growth rate of house prices exceeds that of construction costs, which is favourable for developers. However, the potential acceleration of costs may undermine this source of stimulus in the future.

On the whole, the Hungarian housing market is characterised by a strong demand environment and a gradual adjustment in supply. Despite the dynamic growth observed in recent years, house prices remain below the level justified by the macroeconomic fundamentals. However, the regional discrepancies in the housing market and the strengthening role of lending underline the need for the close monitoring of the market.

" The primary objective of the MNB shall be to achieve and maintain price stability. Without prejudice to its primary objective, the MNB shall support the maintenance of the stability of the financial intermediary system, the enhancement of its resilience, its sustainable contribution to economic growth; furthermore, the MNB shall support the economic policy of the government using the instruments at its disposal. "